- What's in store for FY25 earnings?
- Identifying growth levers ahead of elections.
Sajeet Manghat in conversation with #CapitalMind Founder Deepak Shenoy on 'The Portfolio Manager'.
- Identifying growth levers ahead of elections.
Sajeet Manghat in conversation with #CapitalMind Founder Deepak Shenoy on 'The Portfolio Manager'.
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TVTranscript
00:00 Hello and welcome to NDTV Profit. You are watching the Portfolio Manager and my guest
00:13 today is Deepak Shinnoy, who is the founder of Capital Mind. Deepak, thank you very much
00:18 for joining us on the Portfolio Manager. To begin with Deepak, we just got over with the
00:24 earnings season third quarter. I want to begin with your thoughts on how the earnings have
00:30 shaped up in the third quarter and how do you see going forward?
00:34 It's actually quite interesting. We've seen in fact a lot of mid and small caps announced
00:40 fairly good results. Some of the large caps as well, but overall I think large cap earnings
00:45 have moderated a little bit, largely because you know some big players like SBI and some
00:51 of the banks have relatively muted results in comparison with what was last year. So
00:59 the financials have been a little bit of a letdown, little bit, but not all of them.
01:04 However, we're seeing some of the domestic stories show considerable interest, considerable
01:11 movement in both earnings, revenues and commentary from management. So overall quite happy with
01:19 this result, though I would have said that I probably expected that it would be a slightly
01:24 better quarter because it's the Diwali quarter. It's not been as rewarding as one would have
01:30 thought, though it's still good compared to last year.
01:34 What do you think are the pain points going into Q4 and maybe into next year because we
01:39 have an election coming in, you have a couple of two wars on the backdrop. There is supply
01:49 chain issue, tightness which is coming in and liquidity issue which is also coming in
01:52 into the market. How do you assess the Q4 for some of the companies and how do you go
01:59 into FY25 with these factors in play?
02:04 I think where we are right now is a very interesting point. I think a lot of this problem or pain
02:11 points come in margin compression in some industries. So we're seeing pharma, some of
02:17 the chemical industries show that in their results. We're seeing the banks and the financials
02:22 show lower pat because of higher provisioning requirements by RBI that came in in the last
02:30 part of the last maybe two months of the previous year. And also because in general, you have
02:38 a catch up in terms of liabilities repricing themselves upwards, the deposit prices, deposit
02:44 costs have gone up. Even today, for instance, we saw a 75,000 crore repo apart from 1,75,000
02:55 crore repo that's already been in progress. So the market is essentially demanding money
03:00 from RBI, the banks are. So they've gone from a liquidity surplus situation to a liquidity
03:06 deficit situation. And the cost of funds has therefore increased across the board for financials,
03:13 not now, but it started the previous quarter. So a bit of pain there. I see, however, a
03:18 lot of more, a lot of interesting moves. So for instance, government tax collections are
03:23 very buoyant. There is therefore a feeling that next year the deficit is, I mean, of
03:29 course, in the budget also, they talked about it, the budget, the deficit is going to be
03:32 substantially lower than expected. So they don't have a lot of bonds that are coming
03:39 to issue and then India's bonds, government bonds get added to global indexes. So we're
03:44 going to see a little bit of a reduction in the cost of funds or the supply of bonds from
03:50 the Indian government. So I think government bond prices will go up, yields will come down.
03:54 However, because of the liquidity deficit, I expect FD rates to stay where they are or
03:58 increase from here a little bit. So we're going to see that change from the financials.
04:04 But I do think that a lot of this money that the government has been collecting that's
04:08 going to go significantly into domestic infrastructure spending, domestic energy consumption, energy
04:14 independence, commissioning of maybe a bunch of more alternative energy. So whether it
04:20 is nuclear or whether it is a push higher on EV scale change in terms of fuel or import
04:31 substitution in a way, building in more semiconductor, doing PLI on semiconductors, doing PLI on
04:39 domestic manufacturing in general. I think this gives the government more scope to do
04:44 that. So there will be, I think, a marked increase in activity for domestic manufacturers,
04:53 specifically in the infrastructure sector, the machinery sector, in B2B commerce, and
05:01 perhaps later down the road in domestic consumption as well.
05:05 Exports are not likely to do that well. So IT is one, but a bunch of others as well.
05:09 I don't think that's going to be a very big demand zone for the world. It's simply because
05:17 the world's going through turmoil right now in different ways. America is talking about,
05:21 well, America is doing very well, but the economies there are grappling with tech layoffs
05:28 and unemployment in general. There is also the fear that the Fed will not cut rates.
05:34 So there is perhaps relatively high rates to stay. Europe and China are going through
05:41 a crisis in the debt areas. So I don't think we should bank on exports for the coming year
05:46 or so, but there will be a time to buy exporters, just not now.
05:50 I think the rest of it, we have a bunch of themes in our portfolio, in one of the portfolios
05:57 that we manage, where we actually target make for India, not just make in India. So it is
06:04 essentially the manufacturers, the import substitution concepts and so on.
06:11 I was looking at some of your portfolios, primarily Surge India, which is there. I think
06:16 that's what you're talking about referring to, I think. And then you have the Adaptive
06:20 Momentum portfolio, which is a totally different kind of philosophy which you use for that
06:24 portfolio. How do you go about constructing such a portfolio given this kind of thing?
06:31 Because if I can see, industrial manufacturing accounted for nearly 25.9% of the portfolio.
06:38 That's a huge, you're betting a big on industrial manufacturing, more than one fourth of your
06:42 portfolio on that. So what makes you so bullish on that?
06:46 There is actually, like I said, the PLI, the government ability to push this. The fact
06:51 that India manufactures very little for itself. I'm not saying for sending abroad. This is
06:57 the typical fear that people have is, oh, India will manufacture, but how will it compete
07:02 with China? But no, no, India can compete with China for manufacturing for its own citizens,
07:09 whether it is from clothes to some of the best quality clothes are manufactured in India,
07:15 sent abroad, and then we re-import them and pay the higher prices for them. So there's
07:20 no major level Indian brand that has taken place in a lot of areas, whether it is from
07:28 food to clothing to footwear, our brands are relatively small. So I think that part will
07:37 change over the next few years. And the domestic manufacturing is a part of it. So to make
07:41 larger amounts of everything, you're going to need machinery, you're going to need a
07:47 lot of core high end stuff. For instance, the railway push, the big push in metros,
07:56 a lot of the equipment is being built by Indian companies for the Indian railways and for
08:02 the various metro projects. This is actually going to be big for us. That's what I mean,
08:07 we feel that that's the manufacturing piece is going to be huge in the next five years.
08:11 But many of these companies have run up significantly in the last 12 to 18 months. You still continue
08:17 to consolidate your holding in this or you will add further because the PLI play is not
08:25 just for one year, it's going to play out for at least four to five years for these
08:29 companies. So how will you play that segment?
08:32 Yeah, the PLI thing is a temporary piece for us in the sense that you just get them to
08:39 a point where they scale, right, and then they can command their prices anyways. I would
08:45 say that is the first layer of things that's part of the process. While yes, prices have
08:50 run up, but sometimes prices, you know, they don't necessarily reflect long term realities
08:58 even after they run up. So you've seen this, whether it was at some level when the move
09:02 happened to renewables in a big way, you saw a lot of the public sector power finance companies
09:10 that ran up quite considerably. So some part of that, for instance, was captured in our
09:14 momentum portfolio. But these companies today also are not super expensive. They're eight
09:20 times earnings, they're probably one time book. Many of these companies, although they
09:25 have to demonstrate their potential, the expense is not, you know, it's not as expensive as
09:33 one might think it is. In another set of cases in defense, there are lots of players where
09:38 I think while we've had a run up in the stock price, the earnings growth is going to be
09:43 so significantly large that we're going to talk 2x, 3x, 4x times earnings in the next
09:49 three or four years itself, which gives more opportunity for the stock regardless of whether
09:54 it has run up in the past.
09:57 Can you take the entire defense sector as a whole or you will need to segmentize the
10:01 sector because each company has a different niche and the order book, so if you look at
10:08 from a holistic or top down approach, they may show two years, three years order book
10:12 with them. But it is very, you know, how do I put it, it's going to be very chunky revenues
10:18 which are coming in. We saw some kind of that happening in the Q3 with some of the defense
10:23 companies where revenues and profitability, you know, missed the targets. Over a period
10:29 of time, yes, that will translate into revenue. But when you look at quarter to quarter, maybe
10:34 you need to look at a different, through a different lens for these companies.
10:38 Yeah, the quarters are not relevant. I think the idea here is how the business, every quarter
10:45 is just a more a media concept, right? So you every quarter we have to look at the results
10:51 trying to come to a conclusion that this company is good. I don't think the quarterly results
10:54 matter as much. While you look at them to see whether they're on track, by and large,
11:02 the longer term story is what matters. I don't believe here that you're going to, you know,
11:08 build yourself into a point where, you know, a single quarter is going to change the trajectory
11:14 of a company completely unless something major happens. Usually some of these quarters will
11:19 be like preparing for stuff, the orders in defense, for instance, especially if it's
11:25 coming from, you know, different parts of the ministries and different parts of the
11:29 military bureaucracy. I think you'll find that a lot of orders start flowing in much
11:35 after some of the concepts or some of the things that we talked about. So you'll find
11:40 that they're chunky towards the end. That means maybe three years from now, these orders
11:45 will come into fruition. But then you're not investing for tomorrow and the day after.
11:48 You're not investing for one quarter. You're investing for the long term. So you're going
11:51 to wait till those things come in. And then you know that the defense sector itself is
11:56 going to ask for more. So as you go along, it'd be like, oh, we've got, you know, let's
12:01 say it's a drone manufacturing for the defense. So you might have kamikaze drones, you might
12:07 have drones that survey and come back, you may have drones that are high level and so
12:14 on. But then they won't all come at the same time. It'll be the first set of drones that
12:18 will be given an order initially. And then they will say, okay, from this, we want a
12:21 bunch of other stuff, technology that tracks them, technology that does something, you'll
12:25 have satellite level defense technology also, a bunch of other companies come into play.
12:31 So there is actually, I don't think this is a quarter by quarter thing. This is more a
12:36 long term trend. And what we're doing, what we've done so far is always bought technology
12:41 from foreign companies and told them, listen, you need to set up some local manufacturers
12:46 to manufacturing to kind of support us. But now they're saying, no, let's kind of give
12:53 some of these contracts straight away to Indian companies, let them Indian companies partner
12:57 with whoever they think is the right person and bring in the technology so that we get
13:02 a lot more of the pie. I think that is going to really dramatically increase. It's happening
13:07 in railways as well, where we may be importing some bogeys from China or from some technology
13:14 from Germany. But even in the end, the projects actually managed entirely by companies in
13:19 India. They are doing the partnerships, they're building the maintenance, they'll probably
13:23 take part of the growth. So today, a set of bogeys may come from China, tomorrow, the
13:26 next set of bogeys may come from India and not have to depend on exports. And the domestic
13:34 companies that are listed, they're the ones that will benefit. I think that is the scale
13:38 we're talking about here. We have never seen this. In the past, it's always been relatively
13:43 small. Defence itself has not got its capex fully utilised for a long time. But for the
13:50 first time, you've seen that the government coffers are full, they're able to spend and
13:54 I think infrastructure, railways, logistics, these are the areas that I think dramatic
14:02 improvements are on the way.
14:04 Deepak, let's look at your momentum portfolio, adaptive momentum portfolio. It forms one
14:09 of the largest schemes in your PMS. How do you go about constructing a momentum portfolio
14:16 in this time? Because we have seen a lot of run up happening in many of the sectors, stocks
14:22 and sectors. So how do you decide on stocks?
14:26 So the concept of momentum portfolio doesn't matter what time it is. The idea is to, that
14:33 simple concept is stocks that go up on average keep going up. That means when they go down,
14:40 you must sell them, they're no longer part of your portfolio, given a certain amount
14:44 of time, because obviously, you can't do this on an hourly, daily or even weekly basis,
14:48 we do it now on a monthly basis in the PMS roughly. So that means every month is a small
14:54 rebalance. And that rebalance, we kind of move out stocks that are not on top of our
15:02 ranks in terms of algorithmically ranked portfolio. So you use quantitative factors, simply price
15:08 and volume to find out which stocks have relatively smoother and longer term momentum. And the
15:16 ability for us to kind of use that and we've coded it into an algorithm that allows us
15:24 to see what stocks meet our criteria and are the top level, you know, we rank all stocks
15:31 in this and then we take the positions on them. Whatever stocks sometimes we've seen
15:35 stocks last even a year in this portfolio, sometimes the stocks will come in and go.
15:40 But that's the idea here is when you win, you should win so much that it makes up for
15:46 times when you lose because momentum always has elements where some stocks will show some
15:50 momentum and then that momentum will die soon, right? So you have to exit those stocks. So
15:55 the idea is cut your losers quickly and let your winners run.
16:00 How do you select those kind of stocks? Because do you use fundamentals in some way to look
16:04 at the stock or is purely run up? And are you able to catch a stock before they run
16:09 up?
16:10 We don't have to catch the stock before that. The idea of momentum is they have to catch
16:14 the stocks while they're running, not before. You don't catch bottoms, you don't try to
16:19 catch tops. They let the algorithm filter out what has momentum and then you see we've
16:24 gotten to PFC for instance, last year, and it is up 4x or three and a half times from
16:30 the time we got it. You might look at us and say, well, you didn't get another bottom,
16:34 but that's fine. If you're still making four times in a stock that makes up for a lot of
16:39 small stocks, we would have lost 10-15% because they lost momentum. So the idea is never to
16:45 get another bottom and it's not human selected. It's algorithm selected. You don't use fundamentals.
16:51 You use only the price and then you filter out for low volume stocks. You're not going
16:55 to enter a 100 crore, 500 crore, 1000 crore stock. In fact, because of our volume, we
17:00 run about 800 crores in the portfolio, roughly 20 positions. So you don't want to enter a
17:05 stock that does not have the liquidity to be able to take a position of our size. So
17:09 most likely we're choosing among the top 200, 250 stocks in the first place in terms of
17:15 volume. So you're only going to be largely going to be large or mid cap at the core of
17:21 it. Though right now we have seen some small and small caps actually come into the portfolio
17:27 because there is enough interest in them that makes them available to us. Sometimes they
17:33 have volumes of 100-200 crores a day, even in the small cap level. So they fit our criteria
17:39 saying this and we can enter and exit. The idea of not using timing for this in terms
17:47 of human generated timing is almost like saying, we do not know when this momentum will end.
17:54 Nobody knows. I got six months ago people calling me and saying it might be over now,
17:59 the market has gone up. I said, I don't know. And it's up 35% in six months or 40% in six
18:06 months. And if you had gotten out at that time, try to say that the market has reached
18:11 a top, that would be unnecessarily harmful to long term returns. You have to make the
18:18 big upsides. Otherwise, you will not make great returns.
18:23 Do you consider some of the PSU banks that have run up as part of this momentum portfolio?
18:28 If they're getting selected, they'll come in. They have come in in the past. Right now,
18:33 I think the volumes are, there are not enough numbers in there for us to say that there
18:39 are PSU banks. I think right now, there's probably very few in there that would even
18:46 qualify in the whole financial sector. Though they were there in the past. So it's not like
18:52 this, they've never been there. But right now, they're very less. I don't think we have
18:58 any bank right now in the momentum portfolio. What role does liquidity play in this actually,
19:04 because we mentioned that some of the small caps have also run up and I know now, you
19:09 are getting queries for some of them. But biggest issue with some small caps has been
19:14 liquidity, right? They run up and then suddenly you see that liquidity drying up.
19:18 Yeah, I'll give you an example. It was Yes Bank, a small cap, a few months back it was.
19:26 Yes Bank having liquidity, answer was trading more than 120 crores a day. So if it were
19:32 qualified, it would have come into our portfolio. Sometimes, PFC and REC were mid caps when
19:38 they got into our portfolio. Now they're large caps. So I think liquidity has different phases.
19:46 So we don't try to say that small caps don't have liquidity. We let the volumes suggest.
19:50 So the average volumes of maybe 10 days or 20 days are actually, or median volumes are
19:56 actually high enough. That's good enough for us to say, well, there's enough liquidity
20:00 in the stock. So we have very high filters for liquidity. So almost never do we create
20:05 a stock which is too small and will not have enough liquidity. At our volumes, at our size,
20:14 we simply can't do it. What would be your top four or five stocks
20:19 in this momentum portfolio, given that you do a lot of rejig on a monthly basis? What
20:24 would be the top four or five? Right now, it for instance, still remains REC
20:28 and PFC because they haven't lost meaningful momentum yet. And till January end, they were
20:36 doing very well. So we do have some others. There's a few smaller companies, for instance,
20:44 I think on the large side, we have another trend. On the relatively small side, now it's
20:49 reasonably large, it's still BSE, which has some meaningful volumes, for instance. There
20:56 are stocks like this that have come in. Some of them are actually fundamentally good. BSE,
21:01 for instance, also is there in our Surge India portfolio. Trend is also a very, very fairly
21:05 good stock. LIC is very interesting. It's just started to appear in our momentum portfolio
21:11 as well. So it's early days in terms of this thing.
21:17 But I think right now, what the positions are, if you ask me a month later, it will
21:22 be very different because when the next reshuffle happens, it's quite likely that the top positions
21:29 may change. Deepak, it has been a pleasure talking to
21:32 you today and especially talking about your two portfolio schemes, adaptive momentum portfolio
21:38 and surge. Thank you very much for joining us on the portfolio manager and being on NDTV
21:43 Profit. You're watching the NDTV Profit and that was the portfolio manager with Deepak
21:49 Shinnoy of Capital Minds. Thank you for watching.
21:52 Thank you.
21:58 (upbeat music)